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THE EFFECT OF UNDER-INSURANCE
Aircraft values are buoyant at present and in some cases the US Dollar values of
particular aircraft have increased by as much as 30% in the past 12 months.
When values are rising rapidly, the dangers of under-insurance loom large.
The problem can be exacerbated when the aircraft is insured in a different
currency to that in which it was manufactured, since you have the additional
aspect of exchange rate fluctuations to contend with.
In general terms, high-ticket general aviation aircraft – particularly
turbines of any type – are most sensibly insured with a value which is expressed
in US Dollars, although a Euro value may be more appropriate for, as an example,
Eurocopter products.
But, whilst insuring in US Dollars may remove any exchange rate exposure, it is
important to keep a close eye on the market value of your aircraft, and to make
adjustments to your sum insured as often as necessary.
You are not locked-in for the
duration of your insurance period: values may be changed at any time.
The Bell 407 is a particularly good example of the potential
problem. Order a Bell 407 today and you’ll be lucky to get a delivery date
before the World Cup in 2010. This means that the market for pre-owned
Bell 407s has soared and current values exceed the new
price of the aircraft when it was originally purchased.
The dangers of finding yourself with an under-insured aircraft are very
real, given that Insurers have the right to declare a “constructive total loss”
if the assessed cost of repairing a damaged aircraft is such that effecting
repairs is not economically viable.
Typically, the trigger point, beyond which a constructive total loss is
the likely settlement route, will be 75% of the sum insured, regardless of the
actual value of the aircraft prior to the accident.
What this means is that, if the assessed cost of repairs is less than 75%
of the sum insured, Insurers are most likely to elect to pay for the aircraft to
be repaired. However, at 75% or
more, a constructive total loss settlement is more probable, meaning that the
Insurers will pay the sum insured, less any applicable deductible, and take the
aircraft as salvage, to be disposed of for the insurers’ benefit.
So, if your 2004 Bell 407 is insured for, say, $1,75m when the current
market value is actually $2,40m, you can easily see that you are going to be
unable to replace your aircraft without either paying in a significant sum, or
downgrading to an earlier model with higher hours, inferior equipment, etc.
The good news is that increasing your sum insured by 35% will not mean a
35% increase in your monthly insurance costs.
The increased premium will be based on only the physical damage portion
of your overall premium and, depending on the revised sum insured, you may even
be given the benefit of a lower rate.
In assessing the value of your aircraft, it’s as well to seek proper
guidance, rather than using guesswork.
After all, in many ways your insurance policy is nothing more than an
offer to sell your aircraft at a pre-agreed price…and you want to ensure that
you receive the best possible value.
The best source for an indication of the current market value will usually be
the distributor of the aircraft concerned.
However, Aircraft Assessing Company (Pty) Ltd (AAC) offers a broad range
of aircraft appraisal services, from a “desktop” valuation to a full technical
inspection and researched market valuation for all types of aircraft.
Costs vary according to the level of valuation and/or inspection
required, but start from as little as R500.
However, the cost of establishing an accurate market value for your
aircraft will always be money well spent and, in some cases, might even be
absorbed by your broker or insurer as an added-value service.
Paul Leaker of AAC may be contacted on (011) 463-5550 or via its website
at www.aircraftassessing.co.za
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